American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings

Author: Mick Bordonaro

Date: May 25, 2011

Introduction

In late 2008 and early 2009, the Chinese Ministry of Commerce’s Anti-Monopoly Bureau released two landmark decisions. The decisions reviewed two major deals: the Anheuser-Busch / InBev merger and Coca-Cola’s proposed acquisition of the Chinese juice producer Huiyuan. The Anti-Monopoly Bureau granted approval to the Anheuser-Busch / InBev deal provided that the combined company refrain from acquiring shares in four named Chinese beer producers. Regulators blocked Coca-Cola’s proposed acquisition of Huiyuan. The Chinese and international legal and business communities reacted with ambivalence to the Anheuser-Busch / InBev decision. Some analysts were pleased that regulators had not imposed stricter provisions on the transaction; others voiced general displeasure with the restrictions, did not perceive the restrictions to serve clear competition law goals, and speculated that national protectionism motivate the restrictions. On the other hand, the international legal and business communities reacted with greater uniformity in denouncing regulators’ rejection of the Coca-Cola / Huiyuan transaction. The terseness of both decisions obfuscates the reasons which motivated regulators to decide as they did and impedes straightforward analysis of the manner in which Chinese regulators may apply competition law in the future.

This paper reanalyzes the two decisions and the collateral legal debate by applying American competition law. Based on this evaluation, this paper concludes that the Anheuser-Busch / InBev merger did not pose a threat to competition within the Chinese nationwide beer market. The paper hypothesizes that the restrictions on the beer merger may be rooted in the goal of maintaining competition within local or regional beer markets. On the other hand, Huiyuan’s market share of China’s pure juice market likely would have triggered American regulators to review the Coca-Cola / Huiyuan merger. Qualitative aspects of Coca-Cola’s market power plausibly could have led American regulators to reject Coca-Cola’s purchase of Huiyuan. This paper evaluates competitive harms posed to China’s nationwide beer and pure juice markets based on the Herfindahl-Hirschman Index (HHI) of market concentration. American agencies often use this tool to evaluate market concentration and anticompetitive risks that mergers within such markets may pose. By applying the quantitative and qualitative tools of American regulators to Chinese competition law cases, this paper provides a level of rigor and detail to the analysis of the Anheuser-Busch and Coca-Cola decisions which is absent from the agency decisions.

Summary of the Decisions

In 2008, InBev and Anheuser-Busch agreed to a merger that, ultimately, created the largest beer producer in the world. In September 2008, the companies submitted the deal proposal to China’s Anti-Monopoly Bureau, which is a subdivision of the Ministry of Commerce (MOFCOM) for review of the merger. MOFCOM released its conditional approval of the deal on November 18, 2008. The decision sparked great interest among lawyers and business people both inside and outside of China because the ruling marked the first time the Chinese government had published an opinion approving a merger under China’s 2007 Anti-Monopoly Law. The Chinese authorities did not stand in the way of the merger; however, they did attach four key conditions to the beer tie up. First, prior to the merger, Anheuser-Busch owned 27 percent of the Chinese beer producer, Tsingtao Beer. Following the merger, the combined firm may not increase its holdings in Tsingtao. Second, if InBev’s controlling shareholders were to change, InBev must promptly inform MOFCOM. . Third, prior to the merger, InBev owned 28.56 percent of Pearl River Beer. Following the merger, the combined company may not increase its holdings in Pearl River. . The combined Anheuser-Busch / InBev may not hold any shares in China Resources Snow Beer or Beijing Yanjing Beer. .

In the fall of 2008, Coca-Cola filed an application with MOFCOM to acquire the Chinese Huiyuan Juice Corporation. In March 2009, MOFCOM handed down its opinion and rejected Coca-Cola’s acquisition plan. MOFCOM citied its authority under the Anti-Monopoly Law to review mergers based on their effects on market concentration within relevant markets and to reject deals which may effectively eliminate or restrict competition. The decision struck the death knell for Coca-Cola’s plans to acquire the Chinese juice maker.

Summary of Legal Bulletins analyzing InBev-Anheuser-Busch merger

In November 2008, MOFCOM published its first decision under the new Anti-Monopoly Law. Chinese regulators investigated the impact that the merger of the two international beer goliaths would have on the domestic Chinese beer market. The international legal community reacted with ambivalence and minor suspicion regarding the soundness of the legal reasoning in the Anheuser-Busch decision and regarding the degree to which competition law concerns actually motivated the regulatory holding. A review of legal bulletins produced by major international law firms provides evidence regarding the nature and depth of the interpretations and criticisms of the Anheuser-Bush ruling.

Legal analyses met the Anheuser-Busch ruling with some cautious optimism and muted praise. Mayer Brown recognized that many international businesspeople and lawyers had feared that the Anti-Monopoly Law would be a tool that government regulators would use blatantly to further national industrial policy. The fact that the government had approved the beer merger, albeit subject to several restrictions, indicated that Chinese regulators were willing to act with a degree of self-restraint in applying the Anti-Monopoly Law as a tool to promote industrial policies favoring China firms over foreign competitors. The Dechert LLP legal alert drew attention to the “protectionist flavor” of the Anheuser-Busch holding’s requirements. Despite this negativity, the Dechert legal alert muted its criticism by, in the same paragraph, also praising the rapid speed with which MOFCOM issued its decision on this merger. Akin Gump’s analysis of the holding emphasized that the decision provided little clarity on the manner in which regulators would apply antitrust law going forward. The alert argued that the Anheuser-Busch holding represented an “unclear doctrinal approach” and that the operative nature of Chinese antitrust law remained on an “unclear trajectory.”

Hypotheses that policies favoring Chinese firms guided the Anheuser-Busch / InBev decision remain poorly substantiated or peripheral to the legal alerts’ central arguments.

Notably, these legal alerts do not fully develop the arguments regarding the role that industrial policy or protectionism played in generating the outcome in the Anheuser decision.  A report from the British firm Freshfields argues that the restrictions regulators placed on the deal signal that “’pure’ competition law” is not the only factor which led to the holding in the Anheuser-Busch case.  Freshfields states that the decision raises the “suggestions” that “industrial policy” played a role in producing the decision.  The Dechert legal alert indicated that that firm believed that protectionism played some role in producing holding.  Dechert avoided fully endorsing the conclusion that industrial policy motivated the Anheuser-Busch decision by referring to a “protectionist flavor” which suffused the decision.  Finally, Akin Gump’s focuses most of its report on the implications the decision has on the procedural aspects of complying with Chinese competition law.  The report then states that the restrictions placed on the deal indicate that industrial policy and protectionism played some role in guiding the decision.  Crucially for the purposes of this paper, the Anheuser-Busch decision’s analyses do not endorse fully the conclusion that Chinese industrial policy guided the Anheuser holding.  This approach contrasts significantly with the legal community’s analysis of the Coca-Cola / Huiyuan decision.  Those analyses, as discussed below, repeatedly argue that it the Chinese desire to protect a domestic champion firm guided that decision.

Summary of Legal Bulletins analyzing proposed Coca-Cola-Huiyuan merger

Soon after the Chinese regulators rejected the proposed Coca-Cola / Huiyuan merger, the international legal community and media lit up with criticism of the decision. These skeptics condemned the decision as thinly reasoned and not motivated by the desire to protect competition within the Chinese market. Rather, as the commentators argued, protectionism of the Chinese market and a desire to nurture Chinese brands and corporations motive the regulatory rejection of the Coca-Cola / Huiyuan deal. Critiques came from prominent American law firms, international businesspeople Chinese government officials, the Chinese media, and the international press. The response to the Coca-Cola / Huiyuan holding contrasts with the response to the Anheuser-Busch decision in that the latter opinion received less vociferous rebuke than the former.

Antitrust experts working for Jones Day and Cleary Gottlieb published independent analyzes of the Coca-Cola decision articulating that regulators did not sufficiently explain why the proposed merger posed dangers to market competition and articulating that economic policy reasons likely motivated the blocking of the merger. The Cleary report notes the brevity of the opinion and then offers the critique that “the decision does not articulate a clear theory of harm that would justify prohibition of the transaction.” In postulating that economic policy motivated the decision, the Cleary report points to the decision’s references to the proposed merger’s potentially harmful effects on domestic small and medium –sized manufacturers and the development of the Chinese fruit juice industry. The Cleary report explains that the Coca-Cola decision must be understood in the context of protecting the Chinese economy and not in the context of preventing anti-completive mergers. The Cleary report concludes with the warning that the “decision may give pause to Western companies considering acquisitions of high-profile Chinese companies, particularly companies with prominent local brands.”

Jones Day’s report echoes many of the opinions and conjectures put forward in the Cleary Gottlieb report. Jones Day criticizes the one-page decision for being overly compendious. The Jones Day report reacts to the Coca-Cola’s decision’s goal of protecting Chinese small and medium-sized juice producers. By pursuing this aim, the report critiques, China’s antimonopoly regulators base their reasoning on arguments not based in competition law and economics. Finally, the report concludes that the “decision may also indicate that MOFCOM intends to closely scrutinize all sizable foreign acquisitions of Chinese companies.”

Both the Chinese and international press have argued, at times with pointed rebuke of China’s antimonopoly regulators, that the Coca-Cola decision lacked a basis in competition law. ’’The Economic Observer’’, a well-respected Chinese newspaper, cited generally the opinions of business analysts explaining that China uses the Anti-Monopoly Law for the purpose of domestic protectionism. ’’The Financial Times’’ reported on reactions to the Coca-Cola decision in March of 2009. Interviews with prominent western and Chinese business people and lawyers convey broad-based suspicion of the motives of Chinese regulators and regulators’ desire to further protectionism and Chinese industrial policy though the competition law. The article reports that the decision stoked fears of protectionism. Further, the decision has the potential to have a long-term deleterious effect on portions of the Chinese economy. For instance, Huiyuan’s Hong Kong shares tumbled 50 percent after the announcement of the decision. The following day, the shares fell an additional 40 percent. A senior dealmaker in Hong Kong states “the antitrust laws have been stretched in order to appease the sentiment of populist Chinese websites.”

Overview of HHI’s Role in American competition law

The following section provides a general overview of horizontal merger law in the United States and pays specific attention to the role the HHI plays in the American regulatory scheme. In August 2010, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) released a document titled: “Horizontal Mergers Guidelines.” “The Guidelines outline the principal analytical techniques, practices, and the enforcement policy of …[the DOJ and FTC]… with respect to mergers and acquisitions involving actual or potential competitors.” The United States’ approach to reviewing horizontal mergers combines both concrete and flexible analytic tools which agency regulators may use in evaluating merging companies. The FTC’s and DOJ’s approach to HHI provides a quantitative and straightforward set of numerical criteria which agency reviewers apply when reviewing mergers. However, HHI is merely one tool at regulators’ disposal in evaluating and predicting the impact that proposed mergers will have on markets and competition. The law imbues regulators with a great deal of discretion in merger review.

U.S. agencies quantitative evaluation of horizontal mergers measures market concentration using the Hirshman-Herfindal Index. HHI analysis of the impact a proposed merger will have on market concentration requires first identifying the companies which compete in the given market and then determining the companies’ respective market shares. The agency records the market share as a percentage and then squares each market participant’s share. The regulators then sum the squares of the market shares to generate the HHI. Thus, if four firms compete in a given market with shares of 30 percent, 30 percent, 20 percent, and 20 percent, the market has an HHI of 2600. One arrives at this number through the following calculation: (302 + 302 + 202 + 202 = 2600).

An elegant feature of HHI analysis is to greatly reduce the need to calculate with accuracy the precise market shares of firms which occupy the competitive fringe of a given market. The nature of HHI analysis is such that the index places greater weight on large firms. All firms have their market power increased geometrically. Converting market shares into HHI scores through a geometric conversion means that firms with larger market shares contribute geometrically more to the final index relative to small market participants. To illustrate this point, consider a market with three firms each with 20 percent market share, 10 firms with two percent market share each, and 20 firms with one percent market share each. The HHI for this hypothetical market is 1260. The three large firms contribute a total of 1200 point to the HHI score; therefore, the large firms account for over 95 percent of the overall HHI. Further, the geometric conversion does not affect the one-percent firms when converting market shares to HHI because one squared is still only one. As a result, when conducting HHI analysis, it is most important to calculate the market shares of firms with large or medium market shares. It is less important to calculate accurately the market shares for firms in the competitive fringe, because these firms have a disproportionately smaller affect on the final HHI.

Once American regulators have calculated an HHI score, they evaluate the data against a benchmark which classifies a market according to its level of concentration and recommends whether regulators should intervene in a proposed merger. Three categories exist. Markets with an HHI under 1500 are unconcentrated. Markets with an HHI between 1500 and 2500 are moderately concentrated. Markets with an HHI over 2500 are highly concentrated. Mergers which result in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis. Mergers which result in moderately concentrated markets that involve an increase in the HHI of the market of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers which result in highly concentrated markets and involve an HHI increase between 100 and 200 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers which result in highly concentrated markets and cause an HHI increase of more than 200 points will be presumed to be likely to enhance market power.

In summation, there are two crucial analytic steps which American regulators perform when evaluating mergers. The first step requires a quantitative analysis of market concentration using the HHI. Horizontal mergers occurring in markets with HHI’s below 1500 are presumed not to pose anticompetitive threats. The second step of the analysis looks at mergers occurring in markets with an HHI score of 1500 or greater. In these markets, regulators have broad leeway to use qualitative and other quantitative tools to review horizontal mergers for anticompetitive threats.

Applying American merger analytics to InBev-Anheuser-Busch merger

This section analyzes the conditional approval of the Anheuser-Busch merger in light of American antitrust guidelines. American regulators perform initial analysis of market concentration relevant to mergers by generating an HHI score based on the squares of the market shares of market participants. Based on data of market shares of beer producers in China at the time of the proposed merger, the national beer market was unconcentrated at the time of the proposed merger. As the merger guidelines states, unconcentrated markets normally do not warrant regulatory action. In light of the American legal and policy approach that unconcentrated markets do not warrant regulatory action, it is unlikely that concerns regarding competition in China’s nationwide beer market motivated regulators to place restriction on the Anheuser-Busch / InBev deal. Alternatively, MOFCOM may have acted out of a concern to protect local markets, which local and regional producers often dominate, in placing restrictions on the beer merger. However, data reflecting local beer market concentrations does not exist with robustness comparable to the data on the national beer markets. Alternatively, protectionism of Chinese firms, as postulated by legal and business analysts, may have played a role in shaping the restrictions.

The distinction between the national and local beer markets deserves brief but dedicated explication. The most robust data on the Chinese beer market, as represented in Table A below, reflects shares of the national market for beer. This data does not account for what market share any beer producer has in given city, province, or region. China is a vast nation with a land mass almost the same as the United States and great variation exists across the country. Tsingtao Beer’s market position exemplifies regional variation in beer consumption. While Tsingtao holds 16 percent of the national beer market, it holds approximately 55 percent of the beer market in its home province of Shandong. Examining only nationwide market shares may obscure, for certain beer producers, market concentration and market dynamics at the regional level.

Table A: Chinese Beer Market Overview by Manufacturer (2008 Estimates)

Company Name Market Share HHI Score China Resources Snow 16 % 256 Tsingtao 16% 256 InBev 10% 100 Carlsberg 8% 64 Heineken 5% 25 Beijing Yanjing Brewery 5% 25 Chongqing Brewery 4% 16 Asahi 3% 9 Other 33% 144

Applying HHI analysis to the nationwide Chinese beer market, as American regulators do for mergers within their jurisdictions, indicates that the Chinese nationwide beer market did not face anticompetitive threats prior to the merger. As discussed above, HHI analysis requires determining the shares firms have in a relevant market, squaring these market shares, summing these squares, and then evaluating the scaled score against the guidelines. Table A’s calculations of the competitive fringe makes an assumption about the fringe which errs on the side of producing a large HHI. The DOJ and FTC define unconcentrated markets as those with HHI scores less than 1500. The pre-merger nationwide beer market avoids the HHI score threshold for moderately concentrated markets by a wide margin. Further, Anheuser-Busch occupied such a small portion of the Chinese beer market that it did not rank among the top eight beer producers in China. The eighth largest beer producer had a market share of only 3 percent. Small producers have a geometrically smaller effect on HHI scores. Thus, first impressions of the Chinese nationwide beer market prior to the merger suggest that the Anheuser-Busch / InBev deal would not present significant anticompetitive threats to competition.

	To accurately probe how American regulators would have evaluated the Anheuser-Busch / InBev merger, it is necessary to determine whether or not the post-merger beer market would have crossed the HHI threshold of 1500 at which point a market qualifies as moderately concentrated.  The preceding HHI estimate of 895 assumes that Anheuser-Busch did not have any statistically significant share of the Chinese beer market as of 2008; even if Anheuser-Busch were the largest player in the competitive fringe, the Chinese national beer market would have remained unconcentrated even if the Anheuser-Busch / InBev merger had occurred.  We know that prior to the proposed merger InBev controlled 10 percent of the market.  To make a projection regarding Anheuser-Busch’s market share, we have to extrapolate from the data presented.  The data indicates that the eighth largest beer producer had market share of 3 percent.  Anheuser-Busch did not rank among the China’s eight largest beer producers.  Thus, it is logical to assume that Anheuser-Busch held no more than 4 percent of the nationwide beer market.  Because the data does not reflect fractions or percentage points, rounding Anheuser-Busch’s projected maximum market share to 4 percent ensures that the market share projections do not underestimate Anheuser-Busch’s market share or their impact on the HHI score.  Under these assumptions, the combined Anheuser-Busch / InBev would have a post-merger market share of 14 percent.  Based on these assumptions, the nationwide beer market, following the merger, would have an HHI of 975.  Put differently, even if Anheuser-Busch had as large as possible of a market share within the competitive fringe at the point of the proposed merger, the Chinese nationwide beer market’s HHI would not exceed 975 after the merger.  As stated above, the American agency rules state markets which have HHI scores below 1500 are presumed to be unconcentrated and mergers can usually occur within such markets without further regulatory review.  Even erring on the side of generating a large projected HHI score as a result of the Anheuser-Busch / InBev merger, the nationwide beer market HHI score falls well within the boundaries for unconcentrated markets. 

Local Concerns

The preceding analysis on China’s beer market does not take into account the fact that Chinese regulators may have issued the restrictions on the Anheuser-Busch / InBev tie up because of perceived anticompetitive risks to local beer markets. The terseness of the agency decision makes it impossible to know for certain why Chinese regulators ruled the way in which they did. However, a brief overview of the importance of local and regional breweries to China’s beer market followed by a discussion of American antitrust law’s evaluation of regional markets demonstrate that it is conceivable that a desire to ensure healthy competition in regional beer markets motivated the restrictions placed on the Anheuser-Busch / InBev merger.

Evidence suggests that the Chinese beer market was and is regionally fragmented with various firms holding greater sway over certain local areas. Local and regional breweries often control a market share advantage vis-à-vis national and global brands in their home markets, and these local beers may not be available outside of their home areas. Distribution channels remain a substantial stumbling block to those brands which do attempt to expand their geographic footprints. The experience of Tsingtao is illustrative of the role that local and regional producers play in their home markets. As of 2008, Tsingtao enjoyed 16 percent of the national beer market. However, within its home province of Shandong, Tsingtao held 55 percent of the market. Finally, the names of the top Chinese companies producing beer for the Chinese market reveal the traditional local identity of the nation’s beer. Of the four Chinese companies which rank among the nation’s top beer producers (China Resources Snow, Tsingtao, Beijing Yanjing, and Chongqing), only China Resources Snow does not derive its name from the name of a city. The evidence presented here regarding the local and regional power dynamics in the Chinese beer market is not intended to be dispositive on the issue. Rather, it is significant because it suggests that it is plausible that Chinese regulators contemplated that the Anheuser-Busch deal posed anticompetitive risks to regional and local beers markets.

American law states that regulators may consider mergers’ competitive effects on geographically bounded markets. A market qualifies as geographically bounded if geography limits some customers’ ability or willingness to substitute some products, or some suppliers’ willingness or ability to serve some customers. For instance, if two merging firms both have plants in City X, and rival plants only exist in a distant City Y, than the merger of the two City X plants may pose anticompetitive risks which manifest only in a particular metropolitan region. Under these conditions, regulators may be able to appropriately bar a merger despite the fact that it does not pose dangers to competition in broader regions or the entire nation.

It is not clear, however, how the merger by Anheuser-Busch and InBev would negatively impact competition in local markets. Firstly, no evidence exists to suggest that Anheuser-Busch or InBev dominate any local markets. If the combined firm does not dominate a local market, than the merger should not raise competition law concerns. Presumably, the anticompetitive problem emanates from the fact that local breweries have the power to dominate local markets without healthy, disruptive competition from firms from other localities. Allowing Anheuser-Busch and InBev to combine their domestic Chinese operations, consolidate distribution channels, and enhance business efficiency could promote productive competition within China. The positive business efficiencies could permit the combined beer conglomerate to enter markets that have traditionally been inaccessible to competitors from other regions.

Ultimately, the brevity of the agency decision placing restrictions on the Anheuser-Busch / InBev merger leaves much of the regulators’ reasoning veiled and shrouded. Nevertheless, by raising the issue that local market dynamics, under American law, warrant distinct treatment from a competition law perspective, this paper points the way for analysis and study based on forthcoming Chinese antitrust decisions. Perhaps, future decisions will provide at least some clarity on how regulators weigh nationwide market competition and local market competition.

Minority Stakes

A final point to query is whether the share-acquisition restrictions that the regulators placed on the merger make sense from a competition law perspective. Regulators placed three relevant restrictions on the merger. First, prior to the merger, Anheuser-Busch owned 27 percent of Tsingtao, and the combined company may not increase this stake. Second, prior to the merger, InBev owned 28.56 percent of Pearl River Beer, and the combined company may not increase this stake. Third, the combined company may not seek to acquire any stock in China Resources Snow Beer or Beijing Yanjing Beer. The decision explains its implementation of these restrictions in a brief and conclusory state. The following paragraphs evaluate the holding and conclude that the restrictions placed on future purchases of Tsingtao and Pearl River Beer shares were not necessary to prevent anticompetitive threats to the nationwide beer market.

HHI analysis of a hypothetical nationwide Chinese beer market in which the combined Anheuser-Busch / InBev purchases Tsingtao Beer indicates that such a beer market would not be concentrated under American merger law. If the combined Anheuser-Busch / InBev had purchased all of Tsingtao in 2008, the Chinese beer market would have had an HHI score of only 1407, which indicates an unconcentrated beer market and gives rise to a presumption that the government need not intervene to prevent anticompetitive harms. This calculation relies on the market data reflecting that Tsingtao occupied 16 percent of the Chinese beer market in 2008 and that InBev occupied 10 percent of the market. The calculation then assumes that Anheuser-Busch had a market share of 4 percent. The calculation then assumes that all other market shares remain as represented in Table A. Even though a putatively combined Anheuser-Busch / InBev / Tsingtao would occupy 30 percent of the nationwide beer market, the nationwide market’s overall HHI score would be on 1407. This HHI score reflects that the rest of the beer remains relatively fragmented. American law treats markets with HHI scores of 1500 or less as indicate that a given market is unconcentrated. Mergers resulting in markets with HHI scores of 1500 or less normally no not warrant regulatory action from agencies seeking to prevent anticompetitive threats to markets. Thus, an HHI analysis indicates that MOFCOM’s limiting of Anheuser-Busch / InBev future acquisitions of Tsingtao shares was unnecessary.

Projected Beer Market if Combined Anheuser-Busch / InBev were to Purchase Tsingtao as of 2008

Company Name Market Share HHI Score Anheuser-Busch / InBev / Tsingtao Maximum 30 900 China Resources Snow 16% 256 Carlsberg 8% 64 Heineken 5% 25 Beijing Yanjing Brewery 5% 25 Chongqing Brewery 4% 16 Asahi 3% 9 Other 29% ~112 Total HHI Score: 1407

An HHI analysis of the second restriction on the Anheuser-Busch / InBev deal also cuts against an argument that a desire to promote competition in China’s national beer market motivated the second restriction. Prior to the merger, InBev owned 28.56 percent of this Chinese brewery. A desire to protect competition within China’s nationwide beer market does not seem to have motivated this restriction. At the time of the merger proposal, Pearl River Beer did not even rank among the top eight beer producers in China. Based on available data, the beer maker most likely did not have more than 3 percent of the nationwide beer market. Even if Anheuser-Busch / InBev were to have acquired all the shares of Pearl River Beer, the combined company would not pose anticompetitive risks to the nationwide beer market. As discussed above, even if Anheuser-Busch / InBev would have acquired all of Tsingtao, the combination of the three companies would most likely not pose anticompetitive dangers under American law. Pearl River has a far smaller market share than Tsingtao; therefore, a fortiori, Anheuser-Busch / InBev’s potential acquisition of Pearl River poses even smaller anticompetitive risks to the nationwide beer market.

The Anheuser-Busch / InBev decision raises the possibility that the restrictions on consolidation in the beer industry may actually impede increased competition in the Chinese beer market. As discussed above, some local Chinese beer markets are dominated by individual beer companies with distribution channel shortcomings contributing to the low level of competition in these markets. By preventing Anheuser-Busch / InBev from gaining controlling stakes in four Chinese beer companies—and any stake at all in two companies—government regulators foreclose one avenue for bringing increased competition to regional markets within China which are dominated by individual brewers. If Anheuser-Busch / InBev were to purchase a controlling stake in one of the four Chinese beer companies named in the regulatory decision, it is possible that the global firm would bring its distribution power and skills to bear on the Chinese market. Such an outcome could quite plausibly have a positive effect on local beer markets currently mired in inefficiencies.

Of course, allowing Anheuser-Busch / InBev greater latitude to acquire local beer companies enhances its power within the Chinese markets and permits the combined firm to compete more vibrantly against domestic Chinese firms. If Anheuser-Busch / InBev were to force out many weak, regional beer companies it could, in theory, diminish competition in regional beer markets. Whether or not Anheuser-Busch / InBev’s pro-competitive effects in China’s regional beer markets would outweigh anticompetitive effects must be probed by another study. Suffice it to say for the purposes of this paper, HHI analysis of the acquisition restrictions presented in the Anheuser-Busch / InBev decision suggest that American antitrust rules would not generate the set of restrictions Chinese regulators placed on the merger.

Applying American merger analytics to proposed Coca-Cola-Huiyuan merger

This section advances two claims regarding Chinese regulators rejection of the Coca-Cola / Huiyuan merger. First, application of American law to the facts of the merger reveal that it is plausible that American regulators would have blocked the merger had they had jurisdiction over the deal. Second, legal analysts, the news media, and business people’s pointed critiques of Chinese regulators’ rejection of the deal are insufficiently rigorous. These commentators have failed to account for and evaluate the implication that American law would have on the merger. American law, naturally, embodies a set of policy choices and political compromises distinct from those which operate in China. However, American law is probative of the legitimacy of Chinese regulators actions insofar as American law represents a legal rubric aimed at protecting markets from anticompetitive behaviors. Thus, if American framework detects anticompetitive risks in the Coca-Cola / Huiyuan proposed merger, it is reasonable that Chinese regulators—applying their own legal framework—would also detect these dangers.

As a threshold matter, it necessary to evaluate the market positions that Huiyuan and Coca-Cola occupied prior to the proposed merger. Business analysis of the juice market requires examining different products which common parlance refers to simply as juice. The overall juice market is comprised of diluted juice, pure juice, and nectar. At the time of the proposed merger Huiyuan had between 40 and 43 percent market share in the pure juice market. The overall juice market was less concentrated than the pure juice and nectars markets. In 2008, Coca-Cola’s Minute Maid brand controlled over 21 percent of the overall juice market, and Huiyuan controlled over 11 percent of the overall juice market.

Under U.S. law, the pure juice market’s market concentration would likely trigger regulatory review. As discussed above, regulators first apply HHI quantitative analysis to a market under review. If the HHI is over a certain limit, regulators have broad discretion to apply qualitative review of the given market and proposed merger. There exist several different ways through which to analyze the Coca-Cola / Huiyuan transaction. It is possible to evaluate the deal from the impact it would have on the overall soft drinks market, the overall juice market, or the pure juice market. Based solely on Huiyuan’s share of the pure juice market, the HHI of this market was between 1600 and 1849, depending on varying estimates of Huiyuan’s pre-transaction market share in pure juice. Markets with HHI’s between 1500 and 2500 qualify as Moderately Concentrated Markets. Even without evaluating any pure juice holding’s the Coca-Cola had prior to the proposed merger, the Huiyuan data alone reveals that prior to the merger pure juice was a moderately concentrated market.

The Horizontal Merger Guidelines do not establish a series of bright line rules whereby an HHI of a given level trigger a certain regulatory response; rather, HHI is a tool that guides agencies in identifying potentially anticompetitive mergers and may be probative of deals which raise anticompetitive concerns.  Other factors which may indicate that a proposed merger poses anticompetitive risks are whether or not the deal involves a particularly powerful firm that has the potential “to expand output rapidly.”  Agencies may look at both the firm’s market concentration in relevant markets and the firm’s power to rapidly expand production.  Agency review seeks to ensure that mergers do not create companies which harm market competition.  The overall policy of the law allows American regulators to use their analytic discretion to block mergers which risk harming market competition.

It is plausible that Coca-Cola, once in control of Huiyuan, could leverage Coca-Cola’s massive bottling, distribution, and marketing infrastructure to dominate the Chinese pure juice market and force smaller market participants out of the market. Data regarding Coca-Cola’s operations in China evidence the beverage giant’s strength in China. As of mid-2009, Coca-Cola operated 38 bottling plants in greater China and counted China as its third largest global market. The corporation was involved in a three-year $2 billion investment plan for China alone. 30,000 employees in China worked directly for Coca-Cola. Coca-Cola’s global power enhances its strength in any individual national market. As the world’s largest beverage producer, Coca-Cola can draw on resources in neighboring countries as it seeks to compete in another national market. The size of Chinese operations, the magnitude of Coca-Cola’s 2009 investment plan for China, and Coca-Cola’s global might are all probative of the corporation’s ability to rapidly expand output—a factor which American regulators consider as probative on whether or not a given firms poses anticompetitive risks.

The facts of the Coca-Cola case present reasons to believe that American regulators could have rejected the merger with Huiyuan based on risks posed to competition in the pure juice market. As stated above, first, had American regulators reviewed the Coca-Cola / Huiyuan deal, they likely would have first examined the HHI of the pure juice market and concluded that this market was moderately concentrated. Once American regulators have made this determination, they are within their discretion to evaluate other facts and circumstances regarding the parties proposing to merge in order to determine if the transaction poses anticompetitive risks. Had American regulators examined these factors, they likely would have considered Coca-Cola’s power in China, Coca-Cola’s global power, and the likelihood that Coca-Cola can increase production quickly.

By understanding that American agencies have several regulatory tools with which they could used to potentially block the Coca-Cola / Huiyuan combination, new light falls on the international legal and business community’s critique of the rejection of the proposed merger. As discussed above, legal and business analysts argued that the Chinese government blocked the deal on protectionist and industrial policy grounds. However, these reports do not account for American standards of horizontal merger review as discussed in this paper. As argued in this paper, American regulators have legal tools which they could have used against the Coca-Cola / Huiyuan deal. This is not to say that it is certain that American regulators would have blocked the Coca-Cola / Huiyuan deal. Rather, the argument in this paper demonstrates that the proposed Coca-Cola / Huiyuan merger does raise serious questions regarding anticompetitive harms. As such, the Chinese regulators’ reaction to the Coca-Cola / Huiyuan proposed merger does not definitively demonstrate—as legal and business analysts argued—that protectionism and industrial policy generated the merger rejection. Rather, as the American competition rules show, the proposed merger actual did raise anticompetitive risks. Thus, it is possible that the Chinese government was acting with the intention of protecting market vibrancy in rejecting the proposed deal.

Conclusion

The reanalysis of the Anheuser-Busch / InBev and Coca-Cola decisions in light of American law should prove useful to several different constituencies. Practicing attorneys may find the discussion useful as they attempt to understand more fully the policy choices behind the rules. The brevity of the agency opinions makes understanding the reasoning behind the holdings very difficult. Chinese regulators may find it useful to have a model which applies American competition law to the facts of cases they have decided. These two rulings contain outcomes for the individual cases, but the rulings do not establish a set of rules or legal principles which companies and attorneys may apply to potential future mergers. American law may serve as a template from which Chinese regulators may use to craft their own set of competition law rules. Conversely, Chinese regulators may not wish to constrain themselves by establishing competition rules with precedential effect.

In sum, this paper applies American competition law standards to the holdings Chinese regulators reached regarding the Anheuser-Busch / InBev merger and the proposed Coca-Cola purchase of Huiyuan. By using HHI score analysis, the paper concludes that concerns regarding competition within China’s nationwide beer market likely did not guide that decision. The body of data currently available suggests that concerns regarding competition in local markets may have guided the decision. HHI score and qualitative analysis of the proposed Coca-Cola / Huiyuan merger indicates that, had American regulators reviewed the deal, it is possible that they would have rejected the proposed merger based on fears of the effects that the merger would have on competition within the pure juice market. These conclusions contrast with analysis from the legal and business communities. Legal analysts responded to the Anheuser-Busch / InBev conditional approval with ambivalence and muted critique phrased in generalities. Legal analysts responded to the rejection of the Coca-Cola / Huiyuan merger with pointed rebuke and speculation that China’s regulators had acted out of a desire to fend off a foreign firm attempting to purchase a Chinese company. However, previous analyses of these two merger holdings did not consider how American law and competition policy would have interpreted the mergers.